What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-05-28 compared with 2025-05-28 · 244 added, 181 removed, 179 unchanged (70% of the section changed)

12 unchanged sentences

supply chain pressures;

the recovery of the Electronics/Microelectronics and Medical markets;

international hostilities, including war with Iran;

the recovery of the Electronics/Microelectronics and Medical

maintenance of increased order backlog;

the imposition of tariffs;

timely development and market acceptance of new products and continued customer validation of our coating technologies;

timely development and market acceptance of new products and

continued customer validation of our coating technologies;

adequacy of financing;

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completion of large orders on schedule and on budget;

continued sales growth in the medical and alternative energy markets;

transition from primarily selling ultrasonic nozzles and components to a more complex business providing complete machine solutions and

higher value subsystems;

and realization of quarterly and annual revenues within the forecasted range of sales guidance.

continued sales

growth in the medical and alternative energy markets;

successful transition from primarily selling ultrasonic nozzles and components to

a more complex business providing complete machine solutions and higher value subsystems;

and realization of quarterly and annual revenues

within the forecasted range of sales guidance.

We undertake no obligation to update any forward-looking statement.

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We refer to the twelve-month periods ended February 28, 2026 and February 28, 2025 as fiscal 2026 and fiscal 2025, respectively.

Record $20.5 million, up 4%

from $19.7 million in fiscal 2024, driven by strong shipments to the Alternative/Clean Energy Market.

This marks the highest annual revenue

in company history.

Record $20.9 million, up 2% from $20.5 million in fiscal 2025, reflecting continued demand for high average selling price (“ASP”) production systems and growth in the Medical and Electronics/Microelectronics markets.

Gross Profit:

$9.74 million, down 1%

or $106K from the prior year.

Gross margin decreased to 47.5% from 50%, mainly due to product mix and the reclassification of labor costs

from engineering to cost of goods sold.

$10.6 million, an increase of $821k or 8% from the prior year.

Gross profit percentage increased to 51% from 48%, driven by favorable product mix and a higher concentration of domestic system shipments.

Operating Income:

Decreased $172,000

to $1.01 million compared to $1.20 million in fiscal 2024, due to the decrease in gross profit combined with higher operating expenses.

· Net Income:

Approximately $1.3 million,

down from $1.4 million in fiscal 2024, reflecting a combination of lower gross profit and higher operating expenses.

Equipment and service-related

backlog of $8.67 million at fiscal year-end, down 6.6% from the prior year-end record high of $9.28 million.

US/Canada sales increased

15% (+$1.6 million), driven by a record shipment of five high Average Selling Price “ASP” systems totaling $3.85 million—the

largest number of high ASP systems shipped in a year.

Increased $815,000 to $1.82 million compared to $1.01 million in fiscal 2025, reflecting improved operating leverage and higher-margin system sales.

$1.8 million, up 42% from $1.27 million in fiscal 2025, reflecting strong margin expansion and improved

profitability.

Equipment and service-related backlog of $9.12 million at fiscal year-end, up from $8.67 million in the prior year, reaching an historically high fiscal year-end level.

US/Canada sales increased 12% or $1.4 million, driven by increased shipments of high-ASP production systems and a greater concentration of domestic revenue.

Product Categories:

Integrated Coating

Systems increased 28% (+$814K), and Multi-Axis Systems grew 6% (+$603K), both supported by significant orders from the solar and clean

energy sectors.

· End Markets:

Alternative/Clean Energy

rose 64% (+$3.84 million) driven by production-scale system shipments to the solar market and electrolysis markets, including four high

ASP system deliveries totaling $3.38 million.

The Industrial market declined 47% (-$1.68 million) as our customers saw reduced demand

for float glass coating systems due to rising competition from China-based float glass producers.

Integrated Coating Systems increased 91% or $3.37 million, driven by shipments of multiple high-ASP production systems.

Fluxing Systems increased 53% or $246K.

Multi-Axis Systems decreased 25% or -$2.62 million, primarily due to reduced demand in electrolysis-related applications.

Medical increased 54% or $1.75 million driven by strong demand across drug eluting balloon coating, stent, and diagnostic applications.

Electronics/Microelectronics increased 16% or $864K.

Alternative/Clean Energy declined 19% or -$1.86 million, primarily due to reduced electrolysis-related demand driven by government policy changes, partially offset by strong solar system shipments.

Balance Sheet:

No outstanding debt as

of February 28, 2025, with cash, cash equivalents, and marketable securities totaling $11.9 million, compared to $11.8 million at the

prior year-end.

No outstanding debt as of February 28, 2026, with cash, cash equivalents, and marketable securities totaling $14.8 million, compared to $11.9 million at the prior year-end.

Other Income:

Interest income, dividend

income, and unrealized gains on marketable securities totaled $524K, down $38K due to a slight reduction in interest rates.

Interest income, dividend income, and unrealized losses on marketable securities totaled $442K, down $82K due to a slight reduction in interest rates and a decrease in unrealized gains.

Market and Geographic Diversity

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We have an established infrastructure of application process development

laboratories located at our distributor sites in Japan, China, Germany, Taiwan, Korea and our home office in New York.

These laboratories

are equipped with Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for new coating

applications that our customers bring to us.

Our engineering, service and sales teams all continue to grow as we expand our addressable

markets and enhance our product line to include larger more sophisticated machinery and systems with increased capabilities.

laboratories located at our distributor sites in Japan, China, Germany, Singapore, South Korea and our home office in New York.

laboratories are equipped with Sono-Tek systems and technical personnel to conduct customer demonstrations and process development for

new coating applications that our customers bring to us.

Our engineering, service and sales teams all continue to grow as we expand our

addressable markets and enhance our product line to include larger more sophisticated machinery and systems with increased capabilities.

We believe that the new products we have introduced, the new markets

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Sales and Gross Profit:

Fiscal Year Ended

Cost of Goods Sold

Gross Profit %

Gross profit decreased $106,000, or 1% to $9,739,000 for fiscal 2025

Gross profit increased $821,000, or 8% to $10,560,000 for fiscal 2026

compared with $9,739,000 in fiscal 2025.

The gross profit percentage decreased to 47.5% for fiscal 2025, compared to 50.0% for fiscal

In fiscal 2025 the decrease in the gross profit percentage was a result

of product mix and the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods

sold that started in the fourth quarter of fiscal year 2024 as an outcome of the completion of several successful R&D endeavors.

The gross profit percentage increased to 51% for fiscal 2026, compared to 48% for fiscal 2025.

In fiscal 2026 the increase in the gross profit percentage was influenced

by product mix, including a favorable mix of mature high ASP systems with reduced manufacturing costs.

In addition, sales to the United

States were strong, which carry fewer distributor related expenses.

Product Sales:

Twelve Months Ended

Fluxing Systems

Integrated Coating Systems

In-Line Coating Systems

Multi-Axis Coating Systems

Total sales for fiscal year 2025 grew by 4%, driven by increased demand

for our Integrated Coating and Multi-Axis Coating systems which are commonly used in the clean energy sector.

Integrated Coating System

sales increased by 28%, or $814,000, to $3,703,000 due to continued success with a key strategic partner within the solar energy market.

Printed Circuit Board “PCB” Fluxing System sales declined

35%, or $257,000, largely due to weaker demand in Latin America.

The decrease was driven by a general slowdown in PCB equipment sales

in Mexico and the closure of one of our key distributors in the region.

To address this, we onboarded and trained a New Mexico-based distribution

partner, which we believe will contribute to improved spray fluxing sales in fiscal 2026.

Total sales for fiscal year 2026 increased by 2%, driven primarily

by significant growth in Integrated Coating Systems and Fluxing Systems, partially offset by declines in Multi-Axis Coating Systems and

other product categories.

In-Line Coating System sales increased by 91%, or $3,367,000, to

$7,070,000 due to shipments of multiple high ASP production systems, including several systems delivered to a key customer in the solar

energy market.

This increase reflects continued success in transitioning customers from research and development systems to production-scale

Fluxing System sales increased 53%, or $246,000, to $713,000, primarily

driven by increased demand in Asia.

Multi-Axis Coating System sales decreased by $2,623,000, or 25%, to

$8,055,000, primarily due to reduced demand in electrolysis-related applications within the Alternative/Clean Energy market.

OEM System sales decreased 18%, or $274,000, to $1,210,000, and Other

product sales declined 7%, or $311,000, to $3,861,000, reflecting normal variability in customer demand and order timing.

Overall, product mix in fiscal 2026 continued to shift toward higher-value,

production-scale systems, consistent with the Company’s strategic focus on expanding its portfolio of complex, high-ASP coating

Market Sales:

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Emerging R&D and Other

Sales to the Alternative/Clean Energy market increased 64% in fiscal

2025, driven by a growing number of customers transitioning from our R&D systems to production scale systems, which carry significantly

This growth was partially offset by declines in the Medical and Industrial markets.

Medical sales decreased $930,000, or

22%, to $3.25 million compared to $4.18 million in the prior year, and Industrial sales declined $1.68 million, or 47%, to $1.92 million

compared to $3.61 million in the prior year.

Sales to the Medical market increased $1,754,000, or 54%, to $5,004,000

in fiscal 2026 compared to $3,250,000 in fiscal 2025.

The increase was driven by strong demand for coating systems used in applications

such as balloon catheter manufacturing, specialty stent coating needs, and custom medical device applications.

Electronics/Microelectronics sales increased $864,000, or 16%, to

$6,290,000 in fiscal 2026 compared to $5,426,000 in fiscal 2025, reflecting continued demand for electrically active coatings for diagnostic-related

applications.

Sales to the Alternative/Clean Energy market decreased $1,864,000,

or 19%, to $7,974,000 in fiscal 2026 compared to $9,838,000 in fiscal 2025.

The decrease was primarily attributable to reduced demand

for electrolysis-related systems, influenced by reductions and eliminations of government incentives, partially offset by solar-related

system shipments earlier in the fiscal year.

Industrial sales decreased $348,000, or 18%, to $1,575,000 in fiscal

2026 compared to $1,923,000 in fiscal 2025, reflecting continued variability in demand for industrial coating applications.

Emerging R&D and Other sales remained relatively unchanged and

continue to represent an increasingly smaller portion of total revenue.

As customer applications progress from development-stage activity

to commercial adoption, the related revenue opportunity typically transitions into our larger addressable end markets, including Medical,

Electronics/Microelectronics, Alternative/Clean Energy and Industrial.

Geographic Sales:

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Asia Pacific (APAC)

Europe, Middle East, Asia (EMEA)

Europe, Middle East, Africa (EMEA)

Latin America

In fiscal 2026, approximately 67% of our sales were to US and Canadian

This is compared to 55% in fiscal 2024.

Sales in the US & Canada increased 15% or $1.63 million, driven

by the delivery of five high ASP systems totaling $3.85 million, reinforcing our strategy to provide highly complex, high-volume systems

with premium pricing.

This represents the largest number of high ASP systems sold in a single year.

Growth in the US/Canada region was

partially offset by declines in other regions.

Latin America sales decreased 34% or $412,000, due to a $465,000 float glass coating system

sale into Mexico that occurred in the prior year that did not repeat in fiscal 2025.

Asia sales declined 16% or $510,000, influenced by

continued weak demand from China, where sales fell to $522,000 in fiscal 2025 from $775,000 in fiscal 2024.

China now represents approximately

2.5% of total sales, down significantly from its historical peak.

EMEA sales increased 2% or $98,000, supported by multiple system shipments

to customers in the green energy sector.

This is compared to 61% in fiscal 2025, reflecting a continued shift toward domestic, production-oriented customers and higher-value

system shipments.

Sales in the United States and Canada increased $1,440,000, or 12%,

to $13,946,000 in fiscal 2026 compared to $12,506,000 in fiscal 2025.

This increase was driven by increased shipments of production systems

with high ASPs, including significant system deliveries to a major solar customer, as well as a greater concentration of revenue from

domestic customers where we benefit from lower distribution and logistical costs.

Sales in international markets declined, with Asia Pacific decreasing

$128,000, or 5%, to $2,630,000, Europe, Middle East and Africa decreasing $689,000, or 16%, to $3,742,000, and Latin America decreasing

$218,000, or 27%, to $591,000.

These decreases reflect variability in regional demand and the timing of system shipments.

Operating Expenses:

product development

Twelve Months Ended

Research and product development

Marketing and selling

and administrative

Operating Expenses

General and administrative

Total Operating Expenses

Research and Product Development:

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for fiscal 2026 due to a decrease in salary associated with the departure of a senior engineer, a decrease in research and development

materials and the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods sold

that started in the fourth quarter of fiscal year 2024.

materials, supplies, insurance expense and travel expenses.

These decreases were partially offset by additional lab salaries.

Marketing and Selling:

Marketing and selling expenses decreased slightly in fiscal 2025 to

$3,678,000 due to a decrease in salary expense which was partially offset by an increase in commissions and travel and trade show expenses.

Marketing and selling expenses decreased $153,000 to $3,525,000 for fiscal 2026 due to

a decrease in salary expense, a decrease in travel and trade show expenses and a decrease in commission expense.

During fiscal 2026, we expended approximately $568,000 for travel

and trade show expenses compared with $505,000 for the prior fiscal year, an increase of $90,000.

In fiscal 2025, we expended approximately $767,000 for commissions

as compared with $674,000 for the prior fiscal year, an increase of $93,000.

The increase in commission expense is primarily the result

of an increase in sales being generated by our external distributors, which are commissioned at a higher rate than our in-house sales

The decrease in salary expense is primarily due to the reallocation

of the salary of our Chief Executive Officer, Steve Harshbarger, to the General and Administrative category as described more fully below

under the heading “General and Administrative”.

and trade show expenses compared with $595,000 for the prior fiscal year, a decrease of $27,000.

Our sales and marketing costs are variable,

and a large portion of the costs are dependent upon trade shows and where geographically our sales are generated.

We anticipate that our

costs will increase in the future as we increase our trade show presence and the potential change in geographic origin of our sales from

our in-house sales team to our external distributors.

In fiscal 2026, we expended approximately $635,000 for commissions as compared with $767,000

for the prior fiscal year, a decrease of $132,000.

The decline was driven by a higher mix of sales closed directly by our in-house team.

Our in-house team earns a consistent commission percentage on all sales.

When sales are made through distributors or manufacturer representatives,

we also incur their additional commissions (and related channel costs), which increase total selling costs.

The shift toward direct sales

reduced those third-party costs in the current period.

We expect our marketing and sales expenses to increase in fiscal 2027 as we invest in additional

sales personnel, forward deployed engineering personnel, and programming talent to support new business opportunities, particularly those

associated with production systems that have high ASPs to drive future growth.

General and Administrative:

General and Administrative (G&A) costs increased $329,000 to $2,656,000

for fiscal 2025 due to an increase in salaries, professional fees, corporate expenses and stock-based compensation.

These increases were

partially offset by the reversal of the sales tax accrual described more fully below.

Effective January 1, 2024, Steve Harshbarger became our Chief Executive Officer, having

previously served as President prior to such date.

On becoming Chief Executive Officer, we reclassified the expenses related to Mr.

Harshbarger's

compensation in connection with this positional change.

Prior to January 1, 2024, we classified Mr.

Harshbarger’s salary under sales

expenses because of Mr.

Harshbarger’s instrumental role in that area.

For fiscal year 2025, the total reallocated amount of Mr.

Harshbarger’s salary was approximately $325,000.

In the fourth quarter of fiscal 2024, we were notified by the State

of California that we were required to collect sales tax on our shipments to customers in California.

For taxable sales, we collected

approximately $86,000 of delinquent sales tax from our customers in fiscal 2025.

As of February 29, 2024, on the basis of a preliminary

analysis of our sales to our California customers since April 1, 2019, we recorded an accrual in the amount of $138,000 for the estimated

sales tax, penalties and interest that we may have been required to remit to the State of California.

for fiscal 2026 due to an increase in salaries, insurance expense, corporate expenses, stock-based compensation and other expenses.

increases were partially offset by a decrease in professional fees.

In fiscal 2026 stock-based compensation expense increased $69,000 to $317,000, compared

with $248,000 in fiscal 2025.

The increase in stock-based compensation expense in fiscal 2026 is due to option awards that were issued

in the prior fiscal year.

Option awards are expensed over three years based on vesting terms.

In the fourth quarter of fiscal 2024, we were notified by the

State of California that we were required to collect sales tax on our shipments to customers in California.

In connection with

previous taxable sales, we collected approximately $86,000 of delinquent sales tax from our customers in fiscal 2025.

As of February

29, 2024, on the basis of a preliminary analysis of our sales to our California customers commencing on April 1, 2019, we recorded

an accrual in the amount of $138,000 for the estimated sales tax, penalties and interest that we may have been required to remit to

the State of California.

In the second quarter of fiscal 2025, we filed all necessary sales

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Operating Income:

Our operating income decreased $172,000 or 15%, to $1,010,000 in fiscal

Our operating income increased $815,000 or 81%, to $1,825,000 in fiscal

2026 compared with $1,010,000 for the prior fiscal year.

In fiscal 2025, the decrease in operating income is a result of a decrease in

gross profit combined with an increase in operating expenses.

Operating margin for fiscal 2025 decreased to 5% compared with 6% in fiscal

As a percentage of net sales, operating expenses decreased 100 basis points to 43% in fiscal 2025 compared with 44% in fiscal 2024.

Operating margin for fiscal 2026 increased to 9% compared with 5% in fiscal 2025.

In fiscal 2026, the increase in gross profit was the key factor in the increase in operating income.

Interest and Dividend Income:

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Income Tax Expense:

We recorded income tax expense of $261,000 for fiscal 2025 compared

We recorded an income tax expense of $461,000 for fiscal 2026 compared

with $261,000 for the prior fiscal year.

The decrease in income tax expense in fiscal 2025 is due to the current period’s decrease in income

before income taxes offset by the application of available research and development tax credits.

Net income decreased $168,000 or 12%, to $1,273,000 for fiscal 2025

The increase in income tax expense in fiscal 2026 is due to the current year’s increase

in income before income taxes offset by the application of available research and development tax credits.

The deferred tax asset decreased approximately $384,000, to $1,142,000 at February 28,

2026 from $1,525,000 at February 28, 2025.

Additionally, the deferred tax liability decreased approximately $76,000, to $56,000 at February

28, 2026 from $132,000 at February 28, 2025.

The net decrease in the deferred tax asset and liability was approximately $307,000 for fiscal

This decrease is primarily due to the retroactive expensing of research and development expenses that were capitalized for tax purposes,

prior to the enactment of the One Big Beautiful Bill Act (the “Act” or “OBBBA”) on July 4, 2025.

The Act introduced significant changes to the Internal Revenue Code, including the permanent

extension of many provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) and various new tax incentives and adjustments.

financial reporting implications of the Act were recorded in the income tax provision for fiscal 2026, in accordance with ASC 740, Income

The OBBBA did not change the statutory U.S.

federal tax rate.

Accordingly, the OBBBA did

not compel us to remeasure our deferred tax assets and liabilities solely because of a rate change.

However, the various changes in tax

law did impact our current and deferred tax calculations.

The most significant tax provisions impacting us include:

Bonus Depreciation – The Act permanently restores 100% bonus depreciation for qualified

property acquired and placed into service after January 19, 2025.

Research and Development (“R&D”) Costs – The Act reinstates the ability

for entities to immediately expense domestic R&D costs for tax years beginning after December 31, 2024.

Certain small businesses may

also retroactively expense R&D costs, which were capitalized under the TCJA during the calendar years 2022 – 2024.

In accordance with the Act, for the fiscal year ended February 28, 2026, the Company has

expensed the R&D costs incurred for the current calendar year end.

Pursuant to the Act, R&D costs amounts previously capitalized

and recorded as a deferred tax asset now are eligible to be expensed in full verses being amortized periodically over a five year term.

Any prior year R&D amounts capitalized and not utilized in the current year will be carried over as a deferred tax asset.

have decoupled from the federal tax provisions of the Act and continue to follow the prior tax laws per the 2017 Tax Cuts and Jobs Act

for capitalizing and amortizing R&D costs.

The expensing of these costs is subject to taxable income limitations.

Net income increased $533,000 or 42%, to $1,806,000 for fiscal 2026

compared with $1,273,000 for the prior fiscal year.

The decrease in net income in fiscal 2025 is a result of a decrease in gross profit

combined with an increase in operating expenses partially offset by a decrease in income tax expense.

The increase in net income in fiscal 2026 is a result of an increase in gross profit

offset by a slight increase in operating expenses and partially offset by an increase in income tax expense.

Liquidity and Capital Resources

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The increase in working capital was primarily the

result of the current year’s net income and non-cash charges partially offset by purchases of equipment.

result of the current year’s net income and non-cash charges partially offset by purchases of equipment and redemptions of the Company’s

We aggregate cash and cash equivalents and marketable securities in

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for the $2,879,000 increase in “Cash”:

Net income, adjusted for non-cash items

Net income, after adjustments to reconcile to net cash

To reconcile increase in cash.

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Inventories decrease

Decrease in finished goods for customer orders.

Customer deposits decrease

Decrease due to strong shipments in the fourth quarter of fiscal 2026.

Customer deposits increase

Received for new orders.

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Prepaid and Other Assets increase

Decreased prepaid expenses.

Increase in prepaid expenses.

Income taxes payable decrease

2 unchanged sentences

Equipment and facilities upgrade.

Proceeds from exercise of stock options

Received from exercise of stock options.

Treasury stock purchase

1 unchanged sentence

Net increase in cash

During fiscal 2026 the net increase in our marketable securities was $742,000.

This increase is included in the net increase in cash in the table above.

Stockholders’ Equity – Stockholders’

Equity increased $1,982,000 from $17,792,000 at February 28, 2025 to $19,774,000 at February 28, 2026.

The increase was a result of the

current year’s net income of $1,273,000 and $248,000 in additional equity related to stock-based compensation awards.

These increases

were partially offset by treasury stock purchases of $8,000.

The details of stock-based compensation are explained in Note 4 in our financial

The increase is a result of the

current year’s net income of $1,806,000, proceeds from exercise of stock options of $11,000, and $317,000 in additional equity related

to stock-based compensation awards.

These increases were partially offset by treasury stock purchases of $151,000.

The details of stock-based

compensation awards are explained in Note 4 in our financial statements .

During fiscal 2025 and fiscal 2026, we acquired a total of 44,091 shares of our common

stock pursuant to a Stock Repurchase Plan which terminated in January 2026.

Such shares were held as treasury stock until February 2026

when they were canceled, becoming authorized but unissued.

Operating Activities – We generated $3,246,000

of cash in our operating activities in fiscal 2025 compared with generating $1,164,000 in fiscal 2024, a decrease of $639,000.

in cash generated by operating activities was the result of an increase in accounts receivable combined with a decrease in customer deposit

These uses of cash were partially offset by a decrease in inventories and an increase in income taxes payable.

In fiscal 2025, our accounts receivable increased $877,000 when compared

to the prior year.

The increase in accounts receivable is primarily due to a large number of sales occurring in the fourth quarter of

In fiscal 2025, customer deposit balances decreased $1,007,000 when

of cash in our operating activities in fiscal 2026 compared with generating $525,000 in fiscal 2025, an increase of $2,721,000.

in cash generated by operating activities was the result of increases in accounts payable, accrued expenses, an increase in customer deposits

and a decrease in inventories.

These sources of cash were partially offset by an increase in accounts receivable, an increase in prepaid

expenses and an increase in income taxes payable.

In fiscal 2026, our accounts receivable increased $1,003,000 when

compared to the prior year.

The decrease in customer deposits is primarily due to a large number of shipments occurring in the fourth

The increase in accounts receivable is primarily due to a large number of sales occurring in the fourth quarter

of fiscal 2026.

In fiscal 2026, customer deposit balances increased $657,000 when

compared to the prior year.

The increase in customer deposits is primarily due to a large number of shipments occurring in the fourth

quarter of fiscal 2026.

Investing Activities – In fiscal 2026,

our investing activities provided $2,550,000 of cash compared with using $2,384,000 of cash in fiscal 2024.

Capital spending in fiscal

2025 was $469,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.

This compares with $795,000 for

the prior year period.

In fiscal 2025, net sales of marketable securities generated $3,019,000

of cash compared with using $1,589,000 for the purchase of marketable securities in fiscal 2024.

our investing activities used $968,000 of cash compared with providing $2,550,000 in fiscal 2025.

Capital spending in fiscal 2026 was

$225,000 for the purchase or manufacture of equipment, furnishings and leasehold improvements.

This compares with $469,000 for the prior

In fiscal 2026, we used $743,000 of cash for the purchase of marketable

securities compared with $3,019,000 being generated in fiscal 2025.

Bank Credit Facilities:

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of February 28, 2026, there were no outstanding borrowings under the line of credit.

As of February 28, 2025, $106,000 of our credit line was being utilized

to collateralize letters of credit issued to customers that have remitted cash deposits to us on existing orders.

The unused portion of

the credit line was $1,394,000 as of February 28, 2025.

The letters of credit expire in fiscal year 2025.

At the end of fiscal year 2026, our total backlog

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tax provisions.

On July 4, 2025, the One Big Beautiful Bill Act (the “Act” or “OBBBA”)

was signed into law.

The Act introduces significant changes to the Internal Revenue Code, including the permanent extension of many provisions

of the 2017 Tax Cuts and Jobs Act (“TCJA”) and various new tax incentives and adjustments.

The financial reporting implications

of the Act were recorded in the income tax provision for the quarter and year to date periods ended November 30, 2025, in accordance with

ASC 740, Income Taxes.

The OBBBA did not change the statutory U.S.

federal tax rate.

Accordingly, the OBBBA did

not compel the Company to remeasure its deferred tax assets and liabilities solely because of a rate change.

However, the various changes

in tax law did impact the Company’s current and deferred tax calculations.

The most significant tax provisions impacting the Company include:

Bonus Depreciation – The Act permanently restores 100% bonus depreciation for qualified

property acquired and placed into service after January 19, 2025.

Research and Development Costs – The Act reinstates the ability for entities to immediately

expense domestic research and development costs for tax years beginning after December 31, 2024.

Certain small businesses may also retroactively

expense research and development costs, which were capitalized under the TCJA during the calendar years 2022 – 2024.

In accordance with the Act, for the fiscal year ended February

28, 2026, the Company has expensed the R&D costs incurred for the current calendar year end.

Pursuant to the Act, R&D costs

amounts previously capitalized and recorded as a deferred tax asset now are eligible to be expensed in full verses being amortized

periodically over a five year term.

Any prior year R&D amounts capitalized and not utilized in the current year will be carried

over as a deferred tax asset.

Some states have decoupled from the federal tax provisions of the Act and continue to follow the prior

tax laws per the 2017 Tax Cuts and Jobs Act for capitalizing and amortizing R&D costs.

The expensing of these costs is subject

to taxable income limitations.

Revenue Recognition

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Impact of New Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Improvements to

Income Tax Disclosures.

This ASU requires greater disaggregation of information about a reporting entity’s effective tax rate

reconciliation as well as information on income taxes paid.

This ASU applies to all entities subject to income taxes and is intended to

help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax

information that affects cash flow forecasts and capital allocation decisions.

This ASU is effective for annual periods beginning after

December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact the adoption of this ASU will have on

its consolidated financial statements and related disclosures.

In November 2024, the FASB issued issued ASU 2024-03 – Income

Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income

Statement Expenses, which is intended to provide more detailed information about specified about specified categories of expenses (purchases

of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated

statement of operations.

The guidance in this ASU is effective for fiscal years beginning after December 15, 2026, and interim periods

within fiscal years beginning after December 15, 2027.

In November 2024, the FASB issued ASU 2024-03 – Income Statement

– Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement

Expenses, which is intended to provide more detailed information about specified about specified categories of expenses (purchases of

inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated statement

of operations.

The guidance in this ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal

years beginning after December 15, 2027.

Early adoption is permitted.

The Company is currently evaluating the impact the

adoption of this ASU will have on its consolidated financial statements and related disclosures.

The Company is currently evaluating the impact the adoption of this

ASU will have on its consolidated financial statements and related disclosures.

Other than ASU 2023-09 discussed above, accounting pronouncements

3 unchanged sentences

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements are presented on pages 43 to 60 of this Report.

Our financial statements are presented on pages F-1 to F-17 of this Report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE – None.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis